NSA Fallout Continues, Threatening US Tech Leadership

When The Guardian first published documents given to it by Edward Snowden the effects on the digital economy were pretty low down on the list of media and public concerns. And yet, it may be that the US’s historic leadership of the ICT business, is under threat because of the actions of its government.

On Sunday, the Financial Times revealed (PAYWALL) that Cisco CEO John Chambers had, last week, written an extraordinary letter to President Obama. This followed the release of documents and pictures, which allegedly showed communications equipment supplied by Cisco and other vendors, being adapted for surveillance purposes.

“We ship our products globally from inside as well as outside the United States, and if these allegations are true, these actions will undermine confidence in our industry and in the ability of technology companies to deliver products globally,” Chambers wrote.

“We simply cannot operate this way; our customers trust us to be able to deliver to their doorsteps products that meet the highest standards of integrity and security. We understand the real and significant threats that exist in this world, but we must also respect the industry’s relationship of trust with our customers.”

Chambers, an iconic figure in Silicon Valley, wasn’t blowing smoke. Cisco is perhaps already being hurt by the fallout of the NSA/Snowden affair. It reported flagging orders from emerging countries such as Brazil, Russia, India and China (the famous ‘BRIC’ quartet of countries) and Mexico in its most recent quarter. And in a couple of cases the falls were precipitous, as orders in Brazil dropped 25 per cent, and those in Russia fell by 30 per cent. These are exactly the sorts of countries that economists expect to play a larger role in the future of global business.

Cisco is one of the great tech stock ‘bellwethers’: when it sneezes the whole of the sector tends to catch a cold and it would be naïve to think that it is alone in seeing business affected by the actions of its surveillance agencies. Earlier this year, Box CEO Aaron Levie said that deal cycles had been stretched as organisations pondered security and data governance in the cloud on the back of the NSA revelations. In August last year, Washington, DC think-tank The Information Technology and Innovation Foundation (ITIF) suggested that the US cloud sector could lose up to $35bn over three years in the wake of PRISM.

Other companies, perhaps afraid to exacerbate the situation, have played down the notion of a significant slowdown in international sales and, certainly, the scale and robustness of other markets have insulated American companies from more damage. But the next earnings reports of US companies, especially those with cloud computing and communications at their hearts, could make telling reading.

There are some interesting side notes too. Sandvine has reported surging levels of encrypted internet traffic: up from 1.5 per cent to 6.1 per cent in one year in Europe and from 2.3 per cent to 3.8 per cent in the US.

And still the revelations come: today it was reported that the NSA is recording calls in the Bahamas while garnering call metadata in Mexico, the Philippines and Kenya.

At its worst, the US could face a business Cold War where countries and regions hostile to it (or fearful over data governance) could choose to spend their money elsewhere. If the powerful lobbyists of the tech sector can persuade the US government to act differently, the damage can be mitigated. The stakes are high though and many American CEOs will, like Chambers, urge their political leaders to put in place a new code of conduct that does not deter international buyers or threaten he US’s leadership of the enormous technology economy.